These are just a few posts gathered together from some debates on politics.ie on the necessity for Ireland to leave the Euro and devalue.
11/2/2009 hiding behind a poster: "If we left the Euro we'd be bankrupt within 24 hours, and would no longer be a developed country within a week. Simple as."
imported_Déise: "There are plenty of things wrong with the European project. Ireland's membership of the Euro isn't one of them."
Surely our membership of the euro is having an entirely negative impact on the already on its knees Irish economy. Its not good at all? Look at it this way, did our membership cause Dell et al to pause before pulling out? Not in the slightest. Did it cause foreign investors to pause before they fled out of the Irish stock exchange? No, not at all, they have crashed the Irish stock exchange and being in the euro has helped stem the tide not one little bit.
On the other hand has the negative aspects of being in the euro being mentioned as companies close down etc.? Absolutely, one the main reasons why Waterford Crystal went bust ( http://www.waterford-today.ie/index.php?option=com_content&task=view&id=1628&Itemid=10092&ed=136 ), causing large scale layoffs in Superquinn, Easons, Tesco ( http://www.argus.ie/news/ironic-twist-of-fate-as-customers-flock-to-closing-supermarket-1627396.html ) and threatening to cause retail and exporting meltown all across Ireland, to quote finance magazine:
"With the Irish economy already on its knees the euro’s relative strength against sterling is a further hit to Irish competitiveness with nearly half of all exports from Irish-owned firms headed to the UK.
According to John Coffey at BNP Paribas says, ‘The current GBP weakness is disastrous for the Irish economy, which is already on its knees following the collapse of our property bubble & it’s ripple effect throughout the economy.’"
( http://www.finance-magazine.com/display_article.php?i=8908 )
Also it doesn't give us any sort of confidence on international financial markets because they can see we are going down the tubes despite, and in the case of the current currency movements because, we are in the euro. They are not as clueless about economics as unfortunately as some Irish people are! This is from a document prepared by the Czech Central Bank:
"Has the single currency been helpful in resolving the 2008 financial crisis? Is Euro a shield for Europe against the external shock?
The marcoeconoic situations in Hungary, Iceland or Belgium have shown that countries and their financial markets have been suffering from crisis no matter if they are members of the Euro zone or not." ( www.cnb.cz/m2export/sites/www.cnb.cz/en/public/
The very thing thats killing us people are clinging to like drowning rats! This is beginning to resemble not so much a Lisbon but rather a Stockholm Syndrome !:-)
12/2/2009 Youngdan: There is something severely wrong when an entire country refuses to see that it is bankrupt.
I see what you mean Dan. I think that the atmosphere about the euro and the financial crash would remind you of the line we were sold as regards the British army in the North over the years. Even while serious numbers were being killed we were always told to put it in perspective, if the British army weren't there it would be so much worse! Only a long time later did we find out that if the British army weren't there it would have been a whole lot better, because they were funding and arming so many of the paramilitary groups! Its like they deliberately traded on the irrational fear of people and knew that they would derive a sense of security from being the 'security forces'. I wonder if the European Central Bank and the EU also do not have our interests at heart and anyway have shown throughout the history of the euro no concern whatever about Irish needs and conditions.
Its not a particularly dramatic or abnormal step to leave a currency union, its very common internationally:
"In this paper, we estimate the effect of currency unions on trade exploiting time series (as well as cross-sectional) variation. We use a data set that covers a large number of countries for fifty post-war years. During this sample, a large number of currency unions dissolved, allowing us to use both time series and cross-sectional variation on currency union incidence. In particular, we use the fact that over one hundred country-pairs dissolved common currency linkages during the sample." (http://www.haas.berkeley.edu/~arose/cuts.pdf p.2)
A good example of such a union disintegrating is when we broke with Sterling in 1979, breaking up a 153 year old currency union. Needless to say there was considerable concern at that time as to what would happen but we wisely had introduced some exchange controls before it happened (and which I think they should do now if they break with the euro) and it went smoothly enough. In fact it used to be traditional for Irish economists to blame a lot of our underdevelopment on the fact that we were tied to UK interest rates and currency movements, and indeed after we broke that link the subsequent devaluations were popular and boosted our economy to quite an extent. It used to be held up as one of the reasons for the Celtic Tiger:
"THE INTELLIGENT use of an independent currency is the principal single reason for the Irish economic boom. The key question regarding the 'Celtic Tiger' is why did the Republic's annual rate of economic growth, which averaged 3-4 per cent a year during the 1970s and 1980s, double to 7-8 per cent in 1993-4 and remain doubled since?
The principal reason is that 1993-99 was the only period in the history of the Irish state that it pursued an independent currency policy and allowed the exchange rate to float, following devaluation in 1993.The Irish economy took off on the back of the resulting highly competitive exchange rate. The punt depreciated in value from 110 pence sterling in January 1993 to 79 pence sterling at the time of the introduction of the euro. It also devalued heavily against the dollar. This boosted exports to the US and UK, our two principal markets, and reduced
competitive imports from these countries.( http://www.irishdemocrat.co.uk/window-on-the-eu/euro-mistake/ )
So we can take that step if we like, with intelligent use of exchange controls its certainly possible. Put it this way, the collapsing Irish private sector is facing maybe two huge problems:
a) The fall off from the bursting housing bubble, which has collapsed construction and all related industries including architectural even legal firms etc etc;
b) The effect of the massively uncompetitive Irish exchange rate, which is crippling all Irish export industries - and hidden exports including tourism - and retailers.
The obvious point is that we cannot really solve point (a) at this stage. Its a mess but there is precious little we can really do on that score now (bearing in mind that the govt is now too broke to 'kickstart the economy' via stimulus packages etc.). However we can at least solve problem (b) and give our exporters a fighting chance of survival when now they are facing armageddon especially if sterling falls further? Stop that rot anyway and do something right? Bear in mind as well that we are a particularly open economy. This means that this exchange rate problem has a worse effect on us now than it does for other countries. Virtually all companies can source their goods in the UK, and will do if they are less expensive than Irish goods, and almost all Irish consumers can purchase (and are purchasing) most of their products in the UK if they wish. This therefore is having a really major negative impact on the Irish economy right now.
Ok lets take the doomsday scenario and see is it really credible. Say we float and then the Irish currency collapses 50%. What happens next? Well the currently on its knees Irish hotel and hospitality industries would discover a flood of tourists booking these now incredibly cheap Irish hotel packages. UK, US and European residents would probably start to trawl .ie sites on the internet for all kinds of now cheap goods and Irish manufacturing and exporting would get a huge shot in the arm. Irish agricultural produce would fly off the shelves in the UK and other markets and a huge boom would be created in Irish agriculture. The border areas would be packed with shoppers crossing the border from the north hugely filling the coffers of the very companies which are now almost all facing bankruptcy. In otherwords it would actually give a huge shot in the arm to the very companies and industries that so badly need it just at this moment.
But also in fact it would then stabilise the currency. You see as the above would develop Irish punts would be purchased on a large scale (tourists would buy the Irish currency as they come in, foreign shoppers on .ie sites would be buying in punts, exporters would be bringing in more foreign currency under this arrangement and they would be buying punts as they cash in that currency etc.) and this would drive the Irish currency back up. This is the phenomenon - the beauty - of flexible exchange rates as opposed to the disaster of fixed exchange rates which do not take Irish conditions into account. Again since we are an open economy this effect would kick in very quickly so in practise it is highly unlikely that the currency could stay as low as 50% for very long. Because it is so open an economy it would surely hit Purchasing Power Parity quite fast. (The latter is an equilibrium exchange rate that economists use to estimate where flexible exchange rates would tend towards and settle at. In Ireland its perfectly obvious that this rate would be less than it is now against the major currencies but not nearly as low as 50%.)
Anyway this is why economists like David McWilliams are advising us now to leave the euro. We didn't take the advice of Irish economists when they cautioned us not to join the euro, to our cost, we should at least listen to them now as regards this question of a devaluation. It could give Irish industry something of a fighting chance for survival while if the exchange rate continues like this you can say goodbye to almost the entire Irish private sector.
12/2/2009 FutureTaoiseach: "We don't need the additional complication at this troubled time in our economic history - we have enough on our plate."
Sure we need stable exchange rates at this time. But thats exactly what we don't have? People are being laid off and businesses are closing down the length and breadth of the country because of our hopelessly bad and worsening exchange rate? Its not something bad that could happen in the future, its a disaster that is unfolding in front of us right now?
As regards Soros and the boys, this is my tuppence worth:
a) Notice how in the 16 years since black wednesday sterling has not faced anything like as bad a problem on the currency markets. Why is that? Is it because it introduced some exchange controls that make it now impossible? No, not at all.
Is it because of some new Bank of England credit or currency reserves that make it invulnerable to attack? Not in the least.
You see the reality is that it was the UK's attempt to set an artificial exchange rate - linking it to the DM for political reasons - that caused that crash, not the fact that the currency was floating. I know this is a bit involved but maybe this bit of an analogy could explain my point better:
Imagine if you were watching a few boats being tied up on a dock. In the case of sterling the British were refusing to let sterling float and instead they were propping up sterling via the Bank of England and huge currency purchases etc. So what you are looking at as you look at the boats on the dock is this one boat, sterling, which is kept up above the waterline by the strudy arms of the Bank of England. So Soros is watching this and he sees an economic opportunity. He sees that the level that boat is at is definitely above the real market (water) level, so he raises up a financial storm on the bet that sterling will collapse off its perch and fall to the main water level. As long as he is sure that sterling when it looses this artificial support will fall, then its a sure fire bet.
Now look at what happens if the currency is just floating on that water level to start with. All a currency gambler can do is bop the boat around a bit. You cannot crash it off its artificial support to reach some level that you gamble it should reach because its already floating and hence it will already be at the PPP - equilibrium - level against the other currencies. In short its only when you are bucking the market and trying to hold on to some artificial level of exchange rate that the currency traders can really go after a currency. Truly floating currencies don't have as many problems.
b) Nonetheless sometimes they do have problems I admit and thats where exchange controls come in. Don't forget that after sterling left the ERM that time we stayed on that whole year despite considerable preassure. This was because we had exchange controls in place. We only relaxed them in early January 1993 and after that we couldn't hold it any longer. They are becoming fashionable again in this crisis and definitely we should have them in place if we leave the euro. (Irish Central Bank Quarterly Bulletin Spring 2003 p.100: http://www.centralbank.ie/data/site/spring8.pdf . For a timeline showing the gradual abolition of exchange controls at that time see Box 1, "Central Bank quarterly bulletin" (Dublin, Autumn 2004), p.97: https://www.centralbank.ie/data/QrtBullFiles/2004%2003%20Financial%20Liberalisation%20and%20Economic%20Growth.pdf ) and for a comparison with other countries see: http://www.cesifo-group.de/portal/page/portal/489F79E5520B07A3E0440003BA988603 .)
14/2/2009 Brio: "Euro membership has killed us by 2 things.
One inappropriate interest rates causing boom and bust, and two, harmful foreign exchange rate - strangling our exports."
Exactly, so as the ECB wipes the blood off its dagger after stabbing us twice we stagger over to it and beg it for forgiveness, promise to be good and pass the Lisbon Treaty if it will only save us. This is absolutely crazy, it is their actions which have destroyed and are destroying the Irish economy but our state controlled media - which is not just RTE by any means - are trying to brainwash the Irish people that the exact opposite is true.
Youngdan: "Finally don't worry about the punt plummeting because the further it plummets the better for competativeness."
I agree, some people have maybe missed this point. If we fell say 90% we'd be in clover, but unfortunately I don't think it'd happen. Think about it? Everybody and his grandmother in the US, UK etc would go straight to all the .ie websites and order everything under the sun so gigantically benefiting the Irish economy. Then our currency would pop back up again because all those customers would have to purchase Irish punt to make the transaction. As long as we don't go printing money, like they are doing in Zimbabwe and like the Germans did between the wars, the punt will not become like wallpaper. People have this simplistic idea that a strong currency is good and a weak currency bad, it just isnt that simple. We are now in a depression and in that cycle its well known that devaluations (and to an extent the bigger the better) are among the best solutions to go for. They call them 'competitive devaluations'. While some economists think that they are bad for the world economy in general its usually held that they are very good for the individual country that manages to devalue quickly and deeply. This in fact is what the UK is now doing:
"‘The phrase ‘benign neglect’ seems particularly appropriate as there is no doubt that the UK authorities, especially the Bank of England realised, at an early stage, that a serious downturn was on the way and that significant currency weakness might help mitigate the economic problems to come by assisting the export sector of the UK economy,’ says Ian Stannard, senior currency strategist at BNP Paribas." ( http://www.finance-magazine.com/display_article.php?i=8908 )
And this rush to devalue is quietly spreading around the world:
"Faced with a slowing economy and a widening current account deficit, the Vietnamese central bank devalued its currency, the dong, by 3% on Thursday to boost exports. Earlier, Russia devalued the rouble for the third time in a week, as the price of oil, the country’s largest export, fell sharply.
Earlier this month, there was concern that the Chinese, faced with a drop in exports, may devalue the yuan after president Hu Jintao was reported in the People’s Daily newspaper as saying: “With the spread of the global financial crisis, China is losing its competitive edge in the world market as international demand is reduced.”
And finally, the US dollar index, which measures the value of the currency against a basket of currencies, has fallen to 81.21 from a peak of 88.28 on 21 November. The huge monetary and stimulus plans being unveiled in the US have led to worries over their effect on the dollar and brought back memories of the 40% devaluation of the dollar against gold during the Great Depression.
These are early days, but observers have been warning about the fear of competitive devaluations as export-dependent countries try desperately to boost their economies.
It’s clear that the falling rupee has added to the competitiveness of Indian exports. Also, while it’s true that reports have been coming in about Chinese dumping of goods into India, the 25% depreciation of the rupee against the yuan this year will act as a cushion for domestic manufacturers. In fact, the rupee has even depreciated against the Bangladesh taka and the Sri Lankan rupee this year.
Of course, all this doesn’t affect the argument that the Chinese currency is in any case grossly undervalued and they need to revalue it upwards. And if competitive devaluations do happen, the situation could deteriorate rapidly. But so far, for Indian exporters, the weak rupee has been a help." ( http://www.livemint.com/2008/12/25221652/Fear-of-competitive-devaluatio.html )
"A survey carried out by the NCA last week on a selection of clothing, homeware, maternity/nursery and electrical goods showed that Irish consumers are being charged an average of 51% more than consumers in the UK.
The survey was carried out on 21 January and looked at the prices of 44 products across 13 stores. Prices have not been adjusted to reflect the different VAT rates in ROI/UK." ( http://www.nca.ie/eng/Media_Zone/Press%20Releases/Survey_shows_prices_higher_in_Republic.html )
51% ?!! And if they added in that VAT figure the percentage would be worse! This is exchange rate/ competitiveness armageddon we are facing here. Afaik Irish retailing and exporters never faced anything as bad as that with our main trading partner. That figure represents inevitable disaster, in otherwords it'll be the second shoe to fall for the Irish private sector after the collapse of the housing bubble. This new disaster is now unfolding:
"ISME, the Irish Small & Medium Enterprises Association, has outlined that SME exporters to the UK are facing meltdown, as Sterling continues to dramatically weaken against the Euro. The Association outlined that 95,000 jobs were at risk as the Euro has appreciated against sterling by 16% since the beginning of the year,
A recent ISME survey confirmed,
* 47% of companies export to the UK, 65% of these outlined that it was their main export market.
* 56% are paid in Sterling and 39% in Euro.
* 40% of total SME exports go to the UK
* Two-thirds (65%) outlined that the impact of the strengthening Euro vis-à-vis Sterling is having a negative impact on their business.
* 68% are threatened by UK competitors on the domestic market, 71% on the UK market and 44% in other markets.
* 55% of SMEs are tempted to source raw materials from the UK due to the value of Sterling.
According to ISME Chief Executive, Mark Fielding, “The Situation has obviously reached crisis proportions and continues to get worse ,as Sterling is predicted to weaken further. To put the situation in perspective at present Sterling is trading at .86p against the Euro. If we were still trading in punts that equates to a rate of 1.09p sterling for every old Irish pound. Before the Euro was introduced this level of trading would have been unacceptable to the Government and would have been seen as catastrophic for exporters.
For example, 12 months ago a company selling £100 of goods into the UK would have converted the revenue into €135; the figure today has dropped to €116, a differential of €19. This drastic reduction in income means a similar reduction in net margin as UK customers cannot be persuaded to pay higher prices. The reality is that most indigenous SMEs are not in a strong bargaining position and therefore have to take a cut in margins, now placing them in a loss making situation.
The heavy reliance on the UK market in particular is a huge area of concern. Over twice as many SMEs (47%) export there in comparison to the overall Irish national exports at 17%. This exposure is a double whammy as not only are Irish firms finding it more difficult to compete in the UK market, they are also facing stiff undercutting from UK firms in the domestic and international markets.
“The pincer movement of reducing sales income, as a result of negative currency movements and increasing domestic costs, means that many exporters are walking a very narrow line between continuance and closure, with the most vulnerable being those with no offset on their raw material imports” according to Fielding.
“The strengthening Euro against Sterling presents a major challenge to the indigenous sector, particularly exporters, and will dominate business activity for the foreseeable future. With Sterling forecast to weaken even further, the full extent of the erosion of our competitiveness will become increasingly evident and in fact magnified. ( http://www.isme.ie/stg/public/download.php?site=site3008&file=08319sterling.doc )
And in the ISME report for winter last year:
"27% of respondents [Irish SMEs] are involved in exporting. There has been a sharp, dramatic downturn in exports with 45% of companies reporting a reduction in the value of their exports in comparison to 28% who recorded an increase. This net reduction of 17% compares very unfavourably with the last quarter where a net 4% of companies recorded a reduction. The corresponding figure last year was a net increase of 9%, confirming that there has been a twenty six percentage point turnaround in the last 12 months. Much of this turnaround can be explained by a reduction in international demand. However, there is no doubt, particularly in the last three months, that sterling’s weakness against the Euro is having a devastating impact, particularly for exporters to the UK, the majority who are SMEs." ( http://www.isme.ie/stg/public/download.php?site=site3008&file=08352trendssurvey.doc )
More on this crisis from the Irish Exporters Association and the IFA. Liam Shanahan, IEA president stated:
“National economic recovery depends on maintaining a competitive exporting sector, but the current reality is that Ireland’s traditional exporting industries including the agri-food industry are being undermined by the 20% depreciation of sterling since the end of 2007. Unless action is taken by the Government by implementing a Sterling Equalisation Fund, 13,500 jobs in exporting sectors will be lost and the recessions will be more protracted.’’
The IEA president went on to say:
“We are looking at widespread exposure by a very wide range of export companies in both the manufacturing and services sector to the collapse of sterling. The total at risk export sales exposure of manufacturing and services companies to the UK is €7billion. At risk are 13,500 jobs in export companies. A further estimated 10,000 jobs would be indirectly affected, bringing the total to 23,500.’’
IFA President Padraig Walshe said:
“The agri–food sector has suffered more than most in the current downturn and is now faced with an unviable exchange rate with Sterling. Across a range of exports – dairy products, beef, and mushrooms – there is severe pressure becaus of the current exchange rate.”
“In 2007 Ireland had a competitive exchange rate with sterling of £0.68 = €1. In the course of 2008, in a deliberate policy by the UK Government to gain competitive advantage, sterling fell from £0.73 against the euro at the start of the year to £0.98 at the end of the year and is now at about £0.90. At £0.90 average exchange rate to the euro in the last few weeks, €1 billion of our €3 billion of agri-food exports to the UK will be vulnerable, and 4,400 jobs are under imminent threat.’’ ( http://www.irishexporters.ie/article_1032.shtml )
Btw when they say the sterling/euro exchange rate has worsened by 20% I think they are underestimating it. According to the following graph you get approx. 1 euro = 67p going to 1 euro =90p over the last two years. I make that an appreciation by sterling of approx. 34%
Anyway we hear a lot about competitiveness in the media. No question everybody mentions it and how we will never recover till we fix it etc. Fair enough, but what percentage of our deteriorating competitiveness is caused by the disastrous fixed exchange rate we are in as opposed to domestic controllable costs? Here's the answer from Pat McArdle the chief economist at Ulster Bank:
"Arguably the most coherent contribution was made by the National Competitiveness Council in early January. They showed that we have experienced a 30% loss in competitiveness, two thirds of which reflects exchange rate movements and the remainder excess increases in our cost base." ( http://www.finfacts.ie/irishfinancenews/article_1015714.shtml )
Notice how this debate has developed? Somehow the media has gone on about increased costs etc etc and neglect to mention that two thirds of the problem is caused by our membership of the euro? Look at it another way, how do we solve that third of this problem, our domestic costs? It boils down to either cutting private sector wages by 20% or so or some kind of govt easing of taxes. (Don't forget that most of the increase in costs is caused by govt taxes of some sort, e.g. the increase in ESB charges is just a tax because ESB is state owned.) As regards the govt the air is thick with ideas about PRSI holidays, cuts in the commercial rates, VAT reductions and even govt subsidies to exporters. Unfortunately the govt is obviously completely broke, realistically it cannot afford to either reduce taxes or give anybody a subsidy. Far from it, it'll probably have to increase taxes. The other suggestion of cutting private sector wages runs the considerable risk of throwing large numbers of those workers into bankrupcy, bearing in mind the huge debts they are carrying. Besides if we did that it would presumably collapse consumer demand in the Irish retail sector, hitting hard the very people you were trying to help. Really its hopeless, we cannot solve, in a short timespan anyways, that 33% of the cost problem. Whereas, costless to the Irish Exchequer, you could leave the Euro and presto solve the issue that was the main cause of the problem in the first place.
Yes it is costless to the Irish Exchequer! I strongly think people have got that wrong here. Our leaving the euro would be exactly the same as our leaving the 153 year old sterling monetary union in 1979. Technically at that time you could say I think that the vast majority of the Irish national - and consumer - debt was denominated in sterling, in the sense that the Irish currency and the UK one were the same. The two currencies also circulated in Ireland exactly the same way that the different euro notes now circulate. When we left, this 'sterling' debt became a 'punt' debt one to one. We are - for a few more months anyways - still a sovereign govt. and as such we can move in or out of a currency union to our hearts content and this is definitely NOT considered a default. It wasn't considered that in 1979, nor indeed was the UK considered in default when it left the ERM in 1992, despite the fact that in both cases holders of each country's bonds lost heavily. All that happens is that we announce the creation of a new floating punt (because its floating we don't set a devaluation level, the market decides that, and the float starts at one to one, hence we are not offering to pay the bonds back at a lower rate) and will convert Irish issued euro debt and currency one to one to this new currency. Afaik all, at least I think the majority, of Irish govt issued debt, private debt in Ireland owed to Irish banks, and I think even Irish international bank bond issues, are denominated in Irish Central Bank issued or guaranteed euro currency. So there is no change, we pay back the money one to one with our new punts which is the same currency that the Irish taxpayer pays the Exchequer in. Btw you can tell Irish issued euro notes from others by the letter 'T' written beside the numbers on them. Incidentally its said that in Germany they are already checking their banknotes to see what govt issued them, because apparently they feel the euro will inevitably collapse and they want to have only German issued banknotes ( http://www.ashleymote.co.uk/?p=894 ).
You see I think people are getting mixed up about this because they think that we have a common European bond market, guaranteed by the ECB. Thats not the case, Irish govt debt issued in euro is not the same as German govt debt issued in euro because obviously they attract quite a different interest rate. Hence the market recognises this difference, and its just this different Irish Central Bank euro that breaks off and floats. I admit that some debt might not break off with us like this - e.g. presumably very old Irish issued deutchmark bonds - , but don't forget there are swings and roundabouts here, we gain in some other ways too. For example as of the end of last year the National Pension Reserve Fund had 16.4 billion euro on its books ( http://www.nprf.ie/Publications/2008/Press_Rel_End_2008.pdf ) which would pretty much all rise in value under this scenario. Also the value of agricultural subsidies from the EU would rise as well giving us quite a tidy sum as it did when we devalued before.
Sure there are risks and maybe we should do the same as we did in 1978/9 and issue exchange controls during the changeover. Thats what they did that time. While they were preparing the changeover they introduced these controls (you simply couldn't buy, on a large scale, Irish punts without the permission of the Irish Central Bank) which solves the problem of speculators making hay during the changeover. After that its just a market, and yes there are Soroses out there but most of the time markets operate by standard economic goings on and there is no need to fear them that much. People are talking about capital flight etc., why then not close down the Irish Stock Exchange? They were hit by huge outflows of capital over the course of the last few months, and many calls were made to close it down, but they took it on the chin and the sooner they did that the sooner they will get back on their feet. Much the same goes with the currency. We are now trying to recover with a completely banjaxed artificial exchange rate which some are too paranoid to test in the markets. Sure it'll fall somewhat but we are only putting off the evil day. The longer we delay the more we destroy the Irish private sector, simple as that, and with that gone how do we pay any debts or stave off Irish govt bankrupcy which is looming on the horizon? Lets learn the lessons from other countries and on that score I will give the last word to David McWilliams:
"If we look at economic history, we see that no small country ever recovered successfully from debt deflation by cutting spending and sticking with a hard currency. The evidence from Sweden and Finland in the early 1990s is particularly instructive. Both countries suffered from the same boom-bust cycle as we did. Their banks went bust and had to be nationalised, like ours. And the initial policy reaction from everyone - the government, the trade unions, the media establishment and the senior civil servants -was that the government must reduce spending and the hard currency link to the Deutschmark must be preserved at all costs.
This adjustment failed, as ours will do, because it is intellectually incoherent unless you are prepared to entertain massive unemployment and serious social unrest. Unemployment went to 19 per cent in Finland and the budget deficit to 14 per cent of GDP. Finally, someone shouted stop to this masochistic madness.
Against all their advice, the two governments broke their currency arrangements and reflated the economy by allowing both currencies to fall. The countries recovered quickly and again, against all conventional wisdom, the competitive edge the countries garnered endured. Their banks’ capitalisation worked a treat as well.
Both countries, being small trading economies, had significant foreign debts too. Yes, these did go up, but the revenue associated with the recovery more than covered the increased debt service. Neither country suffered any long-term ramifications in terms of access to foreign capital in the future."
( http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=DAVID+McWilliams-qqqs=commentandanalysis-qqqid=38976-qqqx=1.asp )
What people don't realise, I think, is that the kind of scenario we are in now is very common on the international financial scene: a, typically, small country hanging on grimly to an overvalued exchange rate thinking that somehow the financial markets won't notice that the bad exchange is destroying their real economy, and hence the real source of any ability to pay back debts etc. I think Argentina holding onto the dollar peg would be the classic example. They aren't fooled by this, they know that an overvalued currency is fatal, especially for a small open economy like ours. For example you can read the kind of gossip swirling around Switzerland in 2002:
"The Swiss franc soared from 1.72 to 1.32 against the dollar in one of the most powerful trends I have ever seen in the global foreign exchange market. In the process, the Swiss franc has done serious damage to Switzerland's economy and bought it to the brink of deflation.
An overvalued currency is catastrophic for a small, open economy like Switzerland where exports are 50 per cent of GDP, two thirds of exports directed to the EU. The Swiss franc, therefore, acted as a classic transmission agent for imported deflation in Switzerland. Economic growth is almost nonexistent. Inflation has plunged. Jobless rates have soared to five year highs. Big Swiss corporate giants such as Credit Suisse, ABB, and Zurich Financial are in major financial distress. If ever an economy needed a soaring currency as badly as a dose of cancer, it was Switzerland and the Swiss franc in 2002."
( http://www.pressreleasenetwork.com/newsletter/nlfin_view.phtml?nl_id=33 )
Anyway the point is that right now the financial markets judge the health of an economy by the degree of competitiveness of its exchange rate, moreso than ever before, or at least since the last great depression, as you can see from these comments in the FT:
"If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make themselves more competitive at the expense of everyone else.
But the precedent of a central bank attacking its own currency is disquieting. The falls in industrial production and world trade suggest that everyone on the planet would like a cheaper currency.
This even includes China, which has allowed its currency to gain 26 per cent on a trade-weighted basis over the past four years, and seen its exports suddenly tumble."
( http://www.ft.com/cms/s/0/669f601c-0f70-11de-ba10-0000779fd2ac.html?nclick_check=1 )
Another article in the FT is entitled: "On your marks, get set, devalue" ( http://ftalphaville.ft.com/blog/2009/01/13/51087/on-your-marks-get-set-devalue/ ), which says it all I think!
Anyway the point is that with this emphasis on the competitiveness of exports etc they can see that the Irish, Greek, Spanish and Italian hands are tied and hence that those economies are going to be in great trouble because of this. In fact in some of those countries, particularly in Italy where they always cleverly used devaluations to help their economy, they saw the euro was wrecking their economy as far back as 2005, when a report on this was brought out by HSBC bank. Commenting on that report this economist I think does a good job in clarifying what a devaluation is and how badly you need it in the situation we are in now:
"An HSBC report recently  argued that not only Italy, but Germany and Holland too would be better off out of the euro. More pertinently, the financial markets are already paying less for Italian government debt than German, implying that many think the possibility of being repaid in lira rather than euros is a real one.
The whole point of currencies is to facilitate the efficient redistribution of resources. If my economy’s on the up and I am importing too much of your produce – commanding too many of your resources – then the ensuing strength of my currency allows you to earn more from your exports to me. Keep this up long enough and I lose whatever competitive advantage I had before and the balance gets redressed in your favour. Free-trading currencies are a fabulously powerful progressive force, not so much levelling the playing field as actually positively discriminating in favour of the loser of the last round.
Take this away and there’s no reason why the relatively deprived nation should be any better able to compete next year than this. Add in the free flow of other resources (like labour) and you’ll find that all those with skill, education and funds migrate to the prosperous areas, turning everywhere else into sink holes. In short, you get an exaggerated version of Britain’s long-standing North-South divide across nations." ( http://www.moneyweek.com/investments/the-euro-disaster.aspx )
And that is our fate, we are going to be like the North of England or the Mezzogiorno of Italy unless we can devalue our currency right now. Quite simply put nobody is going to buy our exports and even our domestic retailers will gradually go out of business with the current, calamitous, uncompetitive exchange rate.
An Analogy to the Currency Markets This is just my tuppence worth but as I see it it might help to explain the question of currency markets if you compare them to a hypothetical. Imagine if for some bizarre reason our houseprices were artifically priced, in otherwords some EU agency say set houseprices to be some bureaucratic figure, and it was not set by Irish auctions or by estate agents etc. Then as the underlying economy crashed over the last year maybe some people would say that this bureaucratic price should now change to accomodate the new economic reality, they should now be cheaper. But say there was a strong opinion running against this, people would cry that if the house price level was let float, then it would collapse precipitously, bankrupt the banks, bankrupt householders who had taken out debts based on the price of houses, flatten the Irish Stock Exchange which has many banks and contruction companies which rely on the housing market, floor international confidence in the Irish economy as international investors could see the calamitous collapse in the Irish construction industry etc etc. In otherwords a lot of people would cry out 'don't do that whatever you do!'
But, hopefully anyway, saner heads might prevail. What they would say is that you have to face the pain described above at some point, and the sooner the better, and anyway international markets can see full well that there is a problem here, its not so easy to fool them with artificial figures. But the clincher argument they could use would be to say that if house prices are not allowed to float, and in this case come down dramatically, then the market will in fact never recover. The market will eventually find some kind of equilibrium and houses will trade sucessfully again, if the price is allowed to float. If you kept the figure high and artificial like this all that happens is that in the long run nobody will ever want to buy houses, and hence the Irish economy would just keep on going down and down and down.
Ok I know that explanation is long winded and very theoretical, but thats what is happening now with respect to our trading economy. We don't let the Irish currency float and it is now set at a hopelessly high artificial level. And at this level nobody wants to buy Irish exports or even goods in Irish shops when they can go across the border or buy on amazon.co.uk. In the long run the overhang, i.e. the gap between the artificial fixed price and the potential floating or real price, will just grow and the Irish economy will completely go down the tubes until such time as we can float the currency and touch base with a genuine real level for the Irish exchange rate. The currency markets are just that, a market, the more you hold aloof from the market the more you are living in a fool's paradise of prices that 'should be' x or y as opposed to 'actually are' x or y. Its just not a healthy place to be?
--------------------------------------- Hiding Behind a Poster: "This currency immediately loses value against other currencies, because of our economic situation, the fact that it can only be used domestically, and our lack of FX reserves with which to defend its value. Therefore the cost of servicing both national and personal debt goes through the roof, which by diminishing our likely ability to repay, further multiplies our debt costs - bankrupting the country."
I think if you read any of the main economic commentators who talk about this they all agree that if we leave the euro it does NOT mean that we have defaulted on debts nor does it greatly increase our debt burden. (Because the vast majority of our current debts are denominated in Irish issued euros, which we are perfectly entitled to float if we want to. These euros are not issued by some european body, like the ECB, as can be seen from the fact that we pay a different interest rate on them than the likes of Germany.) As regards our debt burden the current scenario is by far the worst, because the govt is borrowing gigantic sums of money because of our uncompetitive and hence crashed economy. And its uncompetitive because of the exchange rate. (Studies have shown that 2/3rds of our uncompetitiveness has been caused by the exchange rate.)
FutureTaoiseach: [In favour of the Euro but] "I do think, however, that the single interest-rate concept - which helped cause our property crash - should be revisited in favour of separate interest-rates for separate countries."
Absolutely I agree, you need to have different interest rates across the EU but that definitely is not possible with a single currency. In fact Ireland tried every trick in the book that way when we were united to sterling but nothing worked, we imported their interest rate no matter what. That this has always been seen as crazy can be seen I think in the following quotes, starting with Wilhelm Nolling, Professor of economics at Hamburg University former Director of the Bundesbank etc etc:
"The truth is that the ECB is trying to carry out an impossible task," says Nolling. "You cannot set one interest rate for 12 very different nations - that's a problem which won't go away".
Critics dismiss Nolling's views as sour grapes: after all, monetary union stripped his beloved Bundesbank of many of its powers. "That's not the point," he replies.
"The point is that it is simply not in Germany's economic interest to allow major parts of our policy to be implemented by bodies which are not responsible for Germany."
.....[asked should the UK join:]
"Why on earth would you want to join?" he asks.....
"But what influence would you gain if you did?" he retorts. "Your policies would be restricted by euro zone rules. And if Germany can't get the interest rates it needs, why should the UK? You will end up being treated like Ireland or Greece - and a big country like yours deserves more."
.......[asked about Germany leaving the euro:]
"It's not realistic, for now, because we're so committed politically," Nolling says.
"But the whole system could eventually collapse, given the problems when one central bank has to steer an entire continent of nation states. Certainly, the more countries that join, the more ungovernable it will become," Nolling says. "In that sense, the euro was born to die."
( http://www.telegraph.co.uk/finance/2854213/'The-UK-would-be-crazy-to-join-the-euro'.html" )
This is none other than Milton Friedman, a giant in economics circles:
"Germany’s problem, in part, is that it went into the euro at the wrong exchange rate that overvalued the deutsche mark. So you have a situation in the eurozone where Ireland has inflation and rapid expansion while Germany and France have stalled and had the difficulties of adjusting.
The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states.
There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities."
( http://nalert.blogspot.com/2006/02/milton-friedman-on-euro.html )
In fact economists have been predicting the total collapse of the Irish economy, caused by our membership of the euro, long ago, at the height of boom. It was obvious even then the nightmare that the Irish people were going to face because of their membership. This is from Professor Patrick Minford, of Cardiff Business School, writing in the Irish Times 18th Aug 2000:
"One of my fondest memories is of Bertie Ahern at a debate at Trinity College in Dublin shortly after the pound had left the European exchange rate mechanism in September 1992; Ireland was struggling with a punt that had stayed in while the pound had devalued by some 20pc.
Mr Ahern, then finance minister, had a mantra for the evening: "I will not devalue t'e punt". Of course within a few months he had done just that. Why? Because in those days when Ireland controlled its own interest rates and currency it would have been madness to be a fifth overvalued against the country of which you are virtually a part.
Of course, it is this boom that has got such admiring and naive reports from the BBC; but a hard landing cannot be far away. Its most likely form would be a collapse of the incomes policy [he says that Ireland had an 'incomes policy' via its sponsorship of high levels of immigration, which deliberately kept down wages but also boosted demand for things like housing], wage costs escalation, and spending cut-backs by investors and consumers as the Government takes emergency action - perhaps huge tax increases or a floating tax on buying punts (a backdoor floating exchange rate).
The ensuing slump will be far worse than it would have been had the boom been kept under control. Higher inflation and reinforced boom-and-slump is an unattractive recipe for UK citizens and businesses. That's the lesson of Ireland and the euro."
( http://www.btinternet.com/~patrick.minford/dt000508.html )
There are a few bits and pieces here as well as regards the damage the EU and the euro have done to the Irish economy: http://www.indymedia.ie/article/90758 .
c.14/4/2009 Ambrose Evans Pritchard: "He borrowed the plan from Sweden's bank rescues in the early 1990s, but overlooks the key point – it was not the bail-out that saved Sweden's financial system, the country recovered only by ditching its exchange peg and regaining its freedom of action." ( http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5140507/Ireland-is-ECBs-sacrifical-lamb-to-satisfy-German-inflation-demands.html )
This is only common sense, without a devaluation all that is whistling to the wind, as McWilliams points out elsewhere:
"This is known as the Swedish or "bad bank" model. However, as this column has pointed out in the past, there is one seismic difference between the Ireland of today and the Sweden of 1992. The Swedes underpinned their banking bailout with a huge 40pc devaluation of their currency, allowing inflation to rise and so the resulting uplift in property values was swift because it was facilitated by a new softer currency. Their "bad banks" offloaded properties in the recovery and paid back the taxpayer, at a profit, reasonably quickly.
Without the devaluation of the currency and the printing of money in Sweden, the bad bank idea might not have worked so well. In fact, the risk is that it does not work at all and we, the taxpayer, end up not only bailing out the banks but bailing out the bankers and developers; they'd be off the hook and we'd be left carrying the can. So without a devaluation to ease the pain, what can we do now to ensure that we don't end up with a bunch of toxic assets that an asset management company can't sell?"
( http://www.independent.ie/opinion/columnists/david-mcwilliams/bad-bank-plan-is-risky-business-for-taxpayer-1693198.html )
The Irish newspapers now have pictures of the motorways being full of shoppers going North but at the same time they are mighty slow to make the obvious connection. Surely if everybody is buying their stuff outside Ireland is that not the number one cause of the huge shortfall in the Irish Vat revenues and in the big increase in unemployment etc? Ok there is the housing and construction crash I admit but we are way beyond that now, we clearly have deeper problems and I respectfully submit that the fact that Irish prices are 51% more expensive than our main competitor in the UK - 2/3rds of which is caused by the exchange rate - is bound to be having a huge negative impact on retailers and Irish exporters, and that this now might be the real cause of our current economic difficulties.
Don't forget its not just the obvious shopper going across the border that is impacting, there is also e.g. huge online shopping going on ( http://www.finfacts.ie/irishfinancenews/article_1016266.shtml ) and presumably many of those shoppers are buying in sterling and getting their purchases delivered back over here. Also the effect on the exporters is not too obvious, and is downplayed in the media, but is definitely happening as you can see in the sawmill industry for example:
"One sawmiller believes that the drop in sterling needs to be addressed first between growers (suppliers), and customers (timber processors), and at Government level. He said: "Sterling has dropped by almost 30% in value since August 2007, which is unprecedented.
"There is very little coverage in the media on this, even though 97,000 jobs are threatened in irish businesses as a result on the drop in value of sterling, coupled with decreased demand.
"We now need co-operation between the growers and mills on price and security of supply, to help secure orders in Britain in the first quarter, as the Irish market is completely flat, and is likely to stay that way. If all this happens, we would be optimistic for the future, but action is needed immediately, he said. Direct Government intervention is unlikely. A spokesperson for Enterprise Ireland said that the re-introduction of the Market Development Fund, which provided support in the past during fluctuations in sterling, cannot be introduced. It would be in conflict with EU competition law." ( http://www.farmersjournal.ie/2008/1227/farmmanagement/forestry/index.shtml )
Anybody can see we are going down the tubes economically unless we can get out of the euro. Incidentally what about that argument we heard so much of whereby international financial markets would be spooked if they thought we were going to leave the eurozone? As you can see in the above article the international financial press is saying the opposite, they are very well aware that the economy is doomed because its in the euro, and will hence be downgrading its debt quality accordingly. Which of course is exactly whats happening with the ratings agencies giving us the thumbs down and with the interest rate differential with Germany increasing all the time.
16/4/2009 Gadjodilo: "Competitiveness can be regained by keeping Irish inflation below that of our competitors. We're certainly doing that at the moment - with a vengeance."
I know that there are various estimates out there for the level of Irish inflation - or deflation - this year but it seems to be estimated that there will be roughly about a 2-3% fall in inflation in Ireland this year ( http://www.irishelection.com/03/deflation-is-here-for-how-long/ ).
Then in the UK there are talking about an inflation level of c. 0%, or maybe slightly lower, for the same year ( http://caxtonfxcurrencyblogs.blogspot.com/2009/03/uk-inflation-hits-0-lowest-level-in-49.html ). Fair enough it does mean that Irish competitiveness vis a vis the UK is improving by this measure. But notice the rate of improvement? It is calculated that - excluding the VAT rate, which increases the uncompetitiveness - Irish prices are on average 51% more expensive than the UK. ( http://www.nca.ie/eng/Media_Zone/Press%20Releases/Survey_shows_prices_higher_in_Republic.html ) Hence if you are trying to make up a gap of 51% via 2 or 3 per cent a year its going to take you maybe 20 years before we get competitive again! By that stage all Irish exporters and most retailers are long ago bankrupt!
Sam Lord: "I think this point really needs to be addressed and I do not see anyone in any of the political parties doing so ... unless I am missing something."
Its not an accident that the obvious cause of our economic troubles are not being discussed, they want to brainwash us with this good euro, and ECB our saviour, fairytale in order to get Lisbon passed. Then after the referendum you will find that the naked truth will become more evident, no doubt then they will leave the euro as they have to or we are all doomed. They don't care at all about all those businesses lost in the meantime.
McDave: "The only way back is through managed deflation whereby our costs are radically reduced (e.g. commercial rents at least half off their peak, house prices down 50-60%). Pay has to come down too. When we have finally expunged the excess inflation we have accumulated through the C****c T***r years, we can get back in the game. Tourism will return, entrepreneurs won't have ludicrous costs to deal with."
Lloyd-Apjohn: "Also the cost of goods can still be reduced by the government - there are loads of other ways the government could tackle the North South price difference by tackling the stealth taxes for one thing."
With all due respect what other ways? Bear in mind that any ideas you come up with have to recognise that the Irish govt is completely broke, it is obviously totally impossible for the Irish state to now subsidise in any way Irish retailers or exporters because it just doesn't have the money. So easing rates, water charges, ESB rates - which is a state owned company -, PRSI or VAT levels are completely out of the question because of the state of the finances. So then when economists waffle on about the necessity for some kind of 'virtual devaluation' to compensate for not having a real devaluation what they are actually talking about is a massive fall in Irish wage levels. Thats the only thing thats left to restore competitiveness? But look again at the figures that we are talking about here. If say, as a result of some huge national effort, Irish wage levels came down 50%. That would then have the effect of reducing Irish price levels by say 25%, because wage levels are only one element in manufacturing and retailing, those employers still have other costs so reducing their final cost price by about 25% would seem to be about the best you could hope for. Ok so at that point we are still behind the curve by another 25%, Irish exporters and retailers are still way too uncompetitive and still going beneath the waves, and that after the extraordinary effort of cutting wages by half!
You see the basic reason for this is that by focusing in on domestic costs only you are concentrating on only a third of the problem, two thirds are caused by the exchange rate ( http://www.finfacts.ie/irishfinancenews/article_1015714.shtml ) and anyway that other third is mostly down to high govt charges and indirect taxes which again cannot be fixed now because of the state of the finances. And of course realistically reducing wage levels by that amount is not on (mainly because of the huge levels of personal indebtedness in Ireland) the most you could hope for is a fall in wages of a few per cent, say 5% or so, which will make no appreciable difference to our exchange rate/competitiveness crisis. Hence this is just waffle that some Irish economists are going on about, they know that 'virtual devaluation' will never work, the reality is that all Irish businesses worth talking about are all facing the chop because of our membership of the euro.
Gadjodilo: "Devaluing might work in a large economy that can source a lot of what it needs domestically. We can't do that. As a small open economy, this is not an option for us. We will always need to import so much of what we need."
But the exact opposite is of course the truth. A small open economy has more need of getting its exchange rate right vis a vis its main trading partners than a large economy. You see look at it this way. Say in the US the dollar has a bad exchange rate vis a vis Canada and Mexico. Ok this will mean that US traders along those borders will lose out although in practise of course those borders are not nearly as open as the Irish border is anyway, but just for the sake of argument we admit that. But most of the US businesses trading in your average small town in the midwest are not much affected by this. They can source all their inputs competitively where they are and importing stuff all the way from Mexico or wherever is mostly impractical, at least for the smaller businesses and the vast majority of consumers. Now compare that to a small open economy like Ireland. Consumers in Cork are coming up to the North to make at least their big purchases, like say electronic goods and furniture etc, and in a huge ring just north of Dublin everybody is making even their weekly shopping in the North. Meanwhile businesses located in England, like Selfridges are (according to the Sunday Independent last) getting something like a 30% increase in Irish credit card purchases. As regards consumers, there is simply no part of Ireland that cannot take advantage of this 51% differential and in time of course will bankrupt all the native retailers. And thats only at the retail level, its worse at the business level. I would suggest pretty much all Irish businesses could very easily source (and in fact are sourcing) their raw materials in the UK. Book shops can source their books from UK distributors rather than Irish ones, book publishers can get their books printed in the UK rather in Ireland just to take one area where as you can see the native manufacturing goes bankrupt as well. Don't forget too that this effect is magnified in a depression because these businesses are under much more pressure to be price sensitive and competitive. As a small open economy we have no protection from this effect, whereas the likes of the US does.
Gadjodilo: "The fact that we had an unsustainable property boom is not the fault of the euro. Nor is it the fault of the euro that inflation here had been well above the eurozone average. We had the necessary tools to prevent this from happening and didn't use them."
You see the opposite is true, we did not have the 'necessary tools'. The EU and the ECB effectively ran and run the Irish economy, and they drove it into the ground over the last few years. Then they heap the blame on the few Irish players who have only a minuscule role anymore in the Irish economy. They can do this because they control the media (and the political parties, who get their funding from the huge EU political parties that control them) in Ireland a thing very obvious from the last Lisbon referendum. Once we threw away our soverignity over Irish economic matters at the time of joining EMU then there was nothing more we could do to avert the disaster. Under EU rules, we had no capacity to restrict credit etc, as Avril Doyle MEP made clear in the Seanad at the time of joining the EMU:
"The availability of credit at relatively low interest rates has been a major contributory factor to the increase in house prices, which are at historically high levels with reference to average earnings. House prices have risen by 50 per cent since 1994 and there are predictions of further substantial price rises for which evidence already exists. Home ownership is important to Irish people compared to continental Europe, where most people never aspire to owning their home and where rental of private property is the norm. This could become an issue in Ireland and there have been calls for the Central Bank to restrict credit, presumably on the understanding that this will somehow control prices. The Governor of the Central Bank has pointed out that the bank has no authority to restrict credit. In any case, such restriction would be inconsistent with the European Union. It should be made clear that given our ceding of control of monetary policy to the European Central Bank, there will be no question of our Central Bank intervening to restrict credit."
( http://historical-debates.oireachtas.ie/S/0154/S.0154.199803120006.html )."
So that solves that, it is quite clear that the blame for the Irish economic crash lies entirely with them, and in fact now the real cause of the current troubles also lies with them. Evans-Pritchard is quite a respected economic commentator, and the financial pages of the Telegraph are quite widely read among international financiers, and he has put the thing quite bluntly: "Ireland is ECB's sacrifical lamb". That is exactly what is happening, they are destroying the Irish economy to preserve their precious EMU for political and not for economic reasons.
16/4/2009 Easy Tiger: "Who in their right mind will swap their Euros for a punt nua, and secondly the debts are in Euros mostly, so it'll just take more punt nuas to repay them.....monopoly money, aka the new punt."
You know its striking how many of the arguments on here centre around how stupid or lazy or incompetent, or even inbred, Irish people are supposed to be. When we had our own currency before it wasn't 'monopoloy money' or anything like it, it had a good reputation because in general people working in the Irish economy have a good reputation - we have entrepeneurs working with great success all over the world for example - not at all the same reputation as Zimbabwe. Its interesting that we are told sometimes in the media that this new post Celtic tiger generation is suppposed to be much more self confident and thrusting than its predecessors but its obvious when you look at this issue that the opposite is true. For example when Ireland left the sterling currency union in 1978/9, remember this was a huge step considering we had been in it for over 150 years, the Irish authorities and most Irish people thought the Irish pound would rise above sterling. The way they looked at it it made sense for this to happen because we were such a much better run country than that basket case across the water! Whereas now when you put the same potential step to so many Irish people they talk all the time about 'monopoly money' and Zimbabwe etc. People need to rediscover their self confidence as a country, even as a race. There is no good reason whatsoever to feel that this would happen to the Irish currency.
TradCat: "What we have had is the wrong interest rate."
Exactly, that is the wholly all of it as regards the Irish economic disaster over the course of the last decade, and Irish economic commentators, to be fair, recognise this. For example here are some comments from Rossa White, the main economist with Davy stockbrokers in Dublin:
"Ireland was a microcosm of that credit bubble in the western world. Credit was freely available. Mortgage lending terms increased, as did maximum loan-to-values. But the salient difference between Ireland and, for example, the UK and most of the euro area, was that interest rates were totally inappropriate for our circumstances. Output was above potential for most of the period. A point Taylor rule estimate shows that interest rates were inappropriately low (see Figure 6). If we still had control of them, we can only assume that they would have been four or five percentage points higher in 2003-2006 (see: "Ireland's interest rate should be 6%" Davy Weekly Book, January 21st 2005)."
( http://www.davy.ie/content/pubarticles/dotiecr20081013.pdf )
This Irish economist is referring in that last bit to his own article written in 2005:
"When the euro was introduced in 1999, the key imponderable was the answer to the following question: how would the "one-size-fits-all" macroeconomic policy framework satisfy the requirements of such a diverse group of economies? Fiscal policy was still at the discretion of national governments,
albeit with meaningful constraints imposed. But individual governments or monetary authorities could no longer influence exchange rates. More importantly, control of monetary policy was lost.
But losing control over monetary policy to Frankfurt in 1999 has had an impact on the Irish economy. Think of record housebuilding, annual credit growth running at 25%, a near doubling in house prices, and 5.5% average inflation in the service sector. While potentially storing up problems for the future, interestrate-sensitive sectors of the economy contributed handsomely to three years of above-trend growth, followed by a strong recovery from a shallow recession. All of which poses the important question: at what level would the key policy rate stand if the Central Bank of Ireland still had control over it?
Putting all of this together, we reckon that an appropriate policy rate for Ireland is around 6%, fully four percentage points above its actual level.
There is no doubt that an inappropriate policy rate for Ireland is fuelling the booming residential construction sector. One way to think about it is to imagine the mayhem that would ensue were interest rates to rise to 6%. Our worry is that an elongated boom could lead to a more severe correction in the housing market when rates finally begin their ascent (to 3% rather than 6%) or when sentiment changes. A return to higher inflation rates may also occur. Private-sector credit is growing at 26% year on year while services and construction wage inflation is back up to 7%. We may well have to rely on another tool beyond our control to keep inflation in check—further appreciation of the currency."
( http://www.davy.ie/content/pubarticles/wmccr20050124.pdf )
TradCat: "But we are on a dead end street and by the time the next Lisbon referendum comes around the threat of getting kicked out of the EU won't scare people. They will have figured out by then what our problem is. Of course the ECB might have copped themselves on by then."
But we have to wisen up quickly, there is no time to lose here. People have to put preassure on the politicians to get us out of the euro immediately, before it is too late. What kind of timescale do we have before the Irish economy completely collapses because of this unfolding exchange rate/currency disaster?
Well the best example we have is from the late 1992 early 1993 period, the last time we had a very bad exchange rate, when we were above parity with sterling. And we lasted about 3 or 4 months before the disastrous effect of this on the real economy caused us to pull out and get a devaluation. The Irish Minister of Finance announced in the FT 6 January 1993:
"I said I was prepared to hold the line until the end of the year. That has now passed. If the system does not correct itself . . . the pressures on industry are something that cannot be lived with indefinitely.’’( http://www.centralbank.ie/data/site/spring8.pdf )
We are now way passed that and nobody has cried stop yet, if they don't soon we are all doomed.
Gadjodilo: "This is an extraordinarily crude calculation. Are you seriously suggesting that all of the factors that feed into the price differentials will remain static for the next two decades? UK VAT rates must rise - they're artificially low as part of the Brown's stimulus. UK interest rates are also well below their long term level - much more so than those of the ECB. The Brits are building up a huge debt problem that they'll have to pay off further down the line - hence higher taxes."
But in fact its far more likely that Irish Vat rates will have to increase rather than UK ones. Its the Irish public finances that are flying out of control rather than the UK one, and hence will in the long run cause Irish tax rates to go up. I apologise I cannot remember the exact figures but I was listening to the FG TD Leo Varadkar on the radio a short time ago and he was giving some of these figures. I think he said that the Irish Exchequer is paying out something like 2 billion euro this year in interest on the govt debt and in 2013 (or 14, I apologise I cannot remember it exactly) its estimated that we will have to pay something like 11 billion in interest on the vastly increasing debt. So the Irish tax burden will have to rise exponentially, consequently its far more likely that Irish prices will have to rise because of this, either in indirect taxation or indeed in businesses passing on higher tax rates in higher prices. So the effect you are talking about works the opposite way, it is more likely to cause Irish prices to rise higher than UK ones.
Gadjodillo: "There will always be two sides to this coin. Don't devalue and your exports are more expensive. Devalue and imports get more expensive which will eventually feed into prices as a whole in a small, open economy. This is something you have ignored, not to mention then horrors of setting forth in the stormy seas of currency speculation with our punt nua. Devaluing is a cop-out and is a handy means of avoiding more deep-seated problems in the economy - such as the operation of monopolies, overcharging etc."
But imports are manufactured outside Ireland, hence if they get more expensive it doesn't have as negative an effect on Irish employment as over expensive exports and native goods do. Sure if you want to buy the latest Japanese camera or ipod or whatever you are going to be worse off, but the Irish economy in general would definitely be much better off. Most everyday products are or can be sourced in Ireland, if you go to the shop and buy your bottle of milk, rashers and newspaper or whatever you won't notice much effect from the devaluation except that you will buy the products at home and Irish retailers and manufacturers will be able to survive and not go to the wall as they are doing now in droves.
Easy Tiger: "The property bubble piggy-backed on the money flowing into the economy by FDI. It was shameful governance to encourage it, but we all know that."
Gadjodilo: "So, the EU controls property taxes, stamp duty, zoning, planning, incentives to developers? Was it the EU that binned the Bacon Report? Was it the EU that forced us to accept the existence of cartels in large sections of the economy who could charge what they want. Come off it. I think you'll find that the European Commission was arguing against those things over the last decade."
But in fact there are huge rules in place in the EU against govt intervention in a wide range of areas - they claim it distorts competition -, the Irish govt has actually very little say in any of these areas. Even in the run up to and after recent budgets you find the Taoiseach etc going off to Europe to get permission to do virtually anything economically. And what step anyway did the Irish govt take to artificially encourage the overheating of the boom? Irish stamp duty was very high and remained high, it was quite difficult to get planning permission to build anywhere and they introduced new expensive development levies to be paid to the County Councils by the developers. They didn't do anything to encourage this, the root and branch of the problem was our membership of the euro which collapsed Irish interest rates just at the time when they badly needed to go up.
----------------------------------------------------- IrishConservative: "I live in the U.K. and amongst my own family and the many other irish people i know here it is incredibly cheaper for my family resident in ireland to buy something here in uk, have it sent to me and then i post it back or bring it next time i fly home.
A common practice all across the country im sure.
A friend even bought a car here and just paid the duty at the port and it was still cheaper than buying a car in ireland."
Its happening on a massive scale alright and how does anybody think that Ireland Inc. is going to survive if nobody wants to buy anything in Ireland or buy Irish products abroad? Clearly we will just go down the tubes because of this.
GB & NI...........19132.6..........15856.9
Rest of World....13996.1..........15903.2
The UK is 33.6% of our imports, but only 18.4% of our exports."
Yes but its well known that Irish export figures are very lopsided and distorted because of the effect of transfer pricing among the large multinational sector here. For those who haven't heard of that this is the quick and dirty explanation:
Imagine you are multinational manufacturing a cake in country A and you use walnuts from your subsidary in country B and flour from your plant in country C. Say the corporate tax rate in country A and B is 30%, but in C it is 12.5%. What you do then when it comes to compiling your tax returns is that you claim that you sell the cake for say £20 in country A, consisting of £15 paid for flour to your subsidary in C, and £4 paid for walnuts in country B, whereas in fact it might be that the subsidary in C is able to get its raw materials for the flour at a much cheaper price. So your tax returns will show a huge profit in C, where you pay little tax, and very little in A and B, where you would otherwise have to pay big taxes. Since you own all these subidaries its very easy for you to pay them paper profits like this, and very difficult for the tax authorities to prove anything different.
Its well known that this is happening on a massive scale here and its making a complete fiction of Irish export figures to the Eurozone, because so much of the sector that is supposed to be trading into Europe are US multinationals, trading into a high corporate tax area and claiming that this is done via exports from Ireland, a low corporate tax area. Its said that "up to half of Irish corporate tax receipts may relate to taxes paid on profits transferred from other overseas units of US corporations, to its Irish subsidiaries" ( http://www.finfacts.ie/irelandeconomy/usmultinationalprofitsireland.htm ) and it is thought that as much as 15% of our whole national GDP number is caused by transfer pricing ( http://www.thepropertypin.com/viewtopic.php?f=19&t=20621 and see also http://angrybear.blogspot.com/2005/12/output-volatility-gdp-v-gnp.html ).
So for example the Irish subsidary of NCR Global Solutions, which employs just 31 people, is reported to have generated about half of the after tax income of this global company of 28,000 employees! ( http://www.thepropertypin.com/viewtopic.php?f=19&t=20296&start=45 )
The "Irish unit of US high-tech firm SanDisk posts $1 billion in revenues with a payroll of four staff" ( http://www.finfacts.com/irelandbusinessnews/publish/article_10009193.shtml ).
This is from the Wall Street Journal:
"A law firm's office on a quiet downtown street here houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004." ( http://faculty.law.wayne.edu/mcintyre/text/in_the_news/WSJ.com%20-%20Irish%20Subsidiary%20Lets%20Microsoft%20Slash%20Taxes%20in%20U.S.pdf )
Anyway by any reckoning the Irish firms that export into the UK are much more labour intensive, and hence if they hurt it hurts the real economy much more, as the UCD Economist Peter Neary pointed out while trying to stop us joining the euro:
"As against all this, it is often noted that the UK’s share in Ireland’s exports has been in decline for decades and is now below 30%. But this misses two important points. First, it is not just exporters who face competition from the UK. Proximity, a shared language and, in recent years, deregulation driven by the Single Market have made Ireland a natural target for UK firms in all sectors, including some traditionally thought of as non-traded. Second, the firms responsible for the growth in Ireland’s exports to continental Europe, many of them in high-technology sectors such as chemicals and computers, are disproportionately foreign-owned, high-margin and capital-intensive. This makes them much less vulnerable to exchange-rate fluctuations than Irish-owned firms. For both these reasons the exposure of Irish GNP and employment levels to sterling is greater than the UK share of exports would suggest. There is a real danger that a sterling depreciation relative to the euro could cause irreversible damage to the indigenous sector and knock stripes off the Celtic Tiger." ( http://www.economics.ox.ac.uk/members/peter.neary/writings/ios97.pdf )
Gadjodilo: "One small point, according to current government figures, the debt won't be vastly increasing. It'll peak at just over 60% of GDP which is less than half what it peaked at in the late 1980s."
Before the crash it was something like 20%, so in going from 20 to 60 its increasing by a massive 300%, which is a huge increase by any standards.
Gadjodilo: "Irish people do sell ipods and Japanese cameras, by the way. And various other imports. So, there jobs will be hit by inflated prices."
True but clearly its not as big a factor in the real economy - it doesn't bring as much added value - as say agriculture, which is hugely hit now by the currency/exchange rate crisis. Anyway if you are concerned about those jobs it might be worthwhile pointing out that Irish people are buying those products North of the border or on the internet on a vast scale. That sort of trade has collapsed in Irish shops.
Gadjodilo: "The Minister for Finance has loads of scope - he/she basically has to keep an eye on the budget balance."
But in practice they had no real scope at all here. You see the interest rate is the price of money so if you were to compare the situation to something simple like Mars bars then maybe it makes things clearer? If by EU regulation the Irish government was compelled to make available Mars bars for about 60% less than they were priced at before the regulation (which is what happened to Irish interest rates when we joined EMU) then you would naturally find that the consumption would vastly increase, and any step you might take to stop this could only be minimal when the overall price has decreased like this.
Gadjodilo: "And I'd ask you to have a drive around the sprawling housing estates around any Irish town and ask yourself how difficult it was to get planning permission."
Actually if you were listening to Noel O'Gara on the Late Late sometime ago he was making the point that the normal law of supply and demand did not apply at all during the boom, developers only built houses in the small number of places where they could get permission. In fact what happened was that the Local Authorities had drawn up these huge 5 year and 10 year plans (in response I think to EU regulations, mimicking the USSR like so much of what the EU does!lol) which dictated that there was to be huge development around many of the small villages around Meath for example, and development nowhere else. Of course now that its seen as a disaster you don't hear much about how this was all planned, instead its all the developers and bankers fault when actually they didn't have as much discretion as people think.
Gadjodilo: "Bear in mind that the point I was making was that the Irish government should have promoted more competition but didn’t. You seem to be suggesting that the EU would oppose more competition and stopped the Irish government from acting against monopolies and cartels. That's a new one!"
I don't think the question of competition in construction was a particularly big factor, there were lots of companies competing against each other.
Gadjodilo: "The new development levies were introduced very late in the day."
As you can see from the above link developement levies went up a lot since about 1998, just at the beginning of the EMU induced artificial boom. It clearly was increased a lot at different times in different counties, say 1998 in Westmeath, 1999 in Carlow, Cavan and Dunlaoighre's case, 2000 in Meath, 2001 in South Dublin etc., not long after the euro inspired boom had started.
Eurosceptic: "McD the euro has suceeded and will continue to succeed, for germany and most of the northern continental european members where the notion of a currency union actually makes sense."
You see this is very very true. Look at it from the point of view of a sales manager in Mercedez Benz in Germany. As the cars roll off the assembly line he can sell them all across the way to Ireland in the West, or Greece in the South, or the Baltic states to the east without ever changing the currency. The whole thing is marvellous from his point of view, Germany has become the largest exporter in the world sitting at the centre of this spider's web. But it is a total disaster for us, so as the Irish politicians drink their champagne at the EU dos they listen to all this nonsense about the wonderful euro from German politicians where it actually makes at least some sense. But the Irish people they are selling out big time.
14/5/2009 eurosceptic: Prof. David McWilliams writes an excellent piece arguing for the relaunch of the punt. He makes a number of superb points.
Anyone with a basic understanding of economics knows that we can't deflate our way to growth....Monetary policy in Ireland is broken.
What can we do about this? The obvious answer is to leave the euro, reinstitute our own currency, allow it to plummet to reflect the real competitive position of our ruined, feeble economy and start again. The vast majority of economists and commentators say this is not possible. In fact, they ridicule those who suggest that this might be worth entertaining.
Let me just remind you that the vast majority of economists and commentators believed the "soft landing" mantra.
Clearly, the Irish banking system that gambled in Euro would be bankrupt.
In 1992, conventional wisdom said that if we devalued, the economy would implode, investors would take flight and we'd pay for years. In the event, we were forced to devalue and the economy boomed.
The one thing that scares investors most is a dying asset. No one will touch it. I don't know about you, but I'd prefer to live in a country that gives itself a chance of life, than one where the current policies can only lead to slow strangulation.
( http://www.independent.ie/opinion/analysis/ditching-the-euro-could-boost-our-failing-economy-1729557.html )]
I think anyways that we are getting a bit of traction on this, I think more and more people are beginning to realise how disastrous this exchange rate is for the Irish economy. The obvious point is that we are inevitably going down the tubes if we have to compete with the UK on the basis of it having prices 51% less than ours, 2/3rds of that differential being caused by the euro exchange rate (for those statistics see Ireland and the Euro: Why We Need to Leave and Devalue). Its not just that article by McWilliams, just a short while ago Damien Kiberd (educated in economics in Trinity he worked in that capacity for Foir Teoranta, an old state owned Irish bank, later going into financial journalism, a founding member of the Sunday Business Post, station editor of Newstalk etc etc) came out in support of a devaluation in the Sunday Times:
"Comparisons with Finland and Sweden from 1990 to 1993 are fanciful. The Finns suffered an economic contraction of 11% in a short period and saw unemployment rates rise from 3% to 18% over two years. The subsequent rebirth of their economy, however, was based on a very significant currency devaluation of the free-floating Finnish markka and on the fact that its exporters were selling into relatively buoyant markets.
Similarly, the recovery of the Swedish economy was export-led and grounded on a sharp downward adjustment of the value of the Swedish krona.
As things stand in Ireland, nobody is prepared to question our continued membership of the eurozone, which is itself seen as vital to some sort of ultimate recovery and the ongoing "stability" of our financial system, whatever that means.
Our exporters are operating in troubled markets, trading in a hard currency and propping up a very expensive public sector.
The policy implications for Ireland are obvious, but that would involve a sea-change in attitudes and the embracing of what is now considered a heresy - in short, a downward currency adjustment, just like they are having in Britain and America."
(Sunday Times Business 3rd May 2009, p.4)
Also at the very end of March an article came out by Cormac Lucey, a chartered accountant and an Associate of the Irish Management Institute and formerly a govt adviser to the Tanaiste Michael McDowell:
"Joining EMU gave Ireland artificially low interest rates more appropriate to the German economy. The result was a boom in credit, a bubble in house prices and almost a doubling in annual employment growth with a focus on the interest-sensitive sectors of our economy such as construction and financial services. One can see the impact of EMU membership by simply looking at charts that graph Ireland’s house prices and total numbers employed since 1980.
Ireland experienced steady, if unexciting, growth from 1980 to the mid1990s.But in the mid 1990s house price and employment growth changed trajectory and accelerated sharply upwards. The cause was the decision (and its anticipation by interest rate markets), on May 3,1998, at the European Council in Brussels, that Ireland would participate in the third stage of EMU.
The clearest consequence of the decade of unprecedented monetary stimulation since then was a bloated construction sector. By the middle of this decade, over 20 per cent of all males at work in Ireland were employed in the construction sector. The price/earnings ratio of houses in some parts of Dublin (using rental income as a measure of potential earnings) approached 100.
The fundamental problem, however, is that EMU gives us interest rates inappropriate to our circumstances. It is driving us to follow binge eating with crash dieting.
Those who argue that it is good that we are in EMU as it shields us in our current economic crisis miss the point. It was too-low EMU interest rates that got us into this crisis in the first place. Sadly, it is too-high EMU interest rates that will keep us in it for some time to come.
The conceit of EMU is that by joining it, exchange-rate volatility simply disappears. But the volatility associated with exchange-rate movement doesn’t disappear - it just takes another form. With currency flexibility gone, the burden of economic adjustment falls upon employment levels and property prices. Having seen both dramatically outperform our international peers over the decade 1997-2007, we risk seeing them dramatically underperform from 2007-2017."
( http://archives.tcm.ie/businesspost/2009/03/29/story40622.asp )
Recently we had this article from Brian Carey, the Irish business editor of the Sunday Times:
"Currency of crisis
It is running a very close second to the banking crisis in terms of economic impact, but little attention is being focused on the full-blown and ongoing currency crisis. The Irish economy is living through just the apocalyptic nightmare euroscptics predicted when we joined the single currency.
What has the euro ever done for us? Unquestionably, it helped to fuel the property bubble as interest rates were set in Frankfurt at rates inappropriate for our hot-house economy. The single biggest factor in the creation of the Irish property collapse was interst rates that ran substantially below the rate of inflation. Free money.
The painful lesson here is t hat our own central bank did not do enough to curb the access to this cheap credit that was being created in Frankfurt. In future, this can be prevented.
The more intractable issue is trade. Britain is, and always will be, our largest trading partner. It is a market of 60m people on our doorstep.
For exporters, the currency differential with sterling seeps into every cost item, exacerbatring a loss of competitiveness on wages, energy and waste disposal.
Imports are conceivably a bigger problem, just ask any supplier to Tesco. It is not just food. More second-hand imported cars, largely from Britain and Northern Ireland, will be sold in the Republic this year than new cars. In april alone, 6,000 imports were sold.
Of course, the problem is not our membership of the euro but Britain's abscence from it. But it is a problem that is very real, for which there is no easy solution and which cannot be ignored.
If sterling remains weak, the International Monetary Fund may yet still turn up on our doorsteps."
(Sunday Times Business Section 17 May 2009, p.2.)
I think too that as this debate and currency crisis has developed it has been agreed by all economists that a country in our situation must devalue, but, apart from those two above, most economists say we cannot although we would and should if we could. This is an interesting point because it confirms what is obvious to all, which is that being in the euro is proving to be a big part of the problem not a part of the solution. Anyway to look at a few of these economists take for example Dr Alan Ahearne, a lecturer in economics in UCG:
"Small open economies that have suffered property crashes and associated economic and financial crises have almost always relied on devaluations of their currencies to bring about recovery.
Devaluations boost exports and reduce imports by helping to restore lost competitiveness.
As members of the European single currency area, devaluation is not an option. So our economic recovery depends on the Government's ability to engineer a devaluation of sorts by cutting wages across the economy. This is necessarily a more clumsy process than letting the currency drop."
(Sunday Independent 15 Feb 2009 Business Supplement, p.2.)
Similarly Prof Kevin O'Rourke of TCD:
"The right thing to do is to devalue, but that is impossible."
(Irish Independent 26 Feb 2009, Business Section p.7)
Also Brendan Keenan in the Irish Independent is a strong supporter of the euro but he quotes a Finnish economist, Prof Jaakko Kiander, who again highlights how important a devaluation is for a country in our situation:
"A depreciation of 40% in the value of the Finnish currency got it out of its great recession in the 1990s, but the process was extremely painful, a conference organised by the Economic and Social Research Institute (ESRI) will hear today.
[goes on to describe the Finnish situtaion then, 70% fall in stock market, 50% fall in house prices etc]
The crisis eased after the abandonment of fixed exchange rate policy. The Finnish markka depreciated initially by 40%. This combined with a shakeout of unproductive businesses, led to dramatic improvements in competitiveness," Mr Kiander says.
Mr Kiander notes that the currency devaluation which solved the Finnish crisis is not available to eurozone members. "For countries within the eurozone, deflation appears to be the only viable alternative, but the adjustment process is slow and painful," he says."
(Irish Independent Business 30th of April 2009, p.3.)
All this talk about financial markets taking fright if we left the euro presumes that those economists and banking houses cannot see for themselves how bad the euro has been for the Irish economy, and will therefore look askance at Irish debt because it is in the euro. Thats what they mean when they refer to us as one of the 'PIIGS', obviously they mean by that phrase those european economies that have been wrecked because of their membership of the euro. Note for example the 13th of Feb 2009 Monthly Review from the big City of London economic firm, Lombard Street Research. The heading is:
"A road-map for EMU breakup
Membership of EMU was supposed to be a one-way street, with no option to leave. But, as history shows,.......
[The point of view of some EMU members:]
Why not? Interest rates are rising, exchange rate and monetary policy are unavailable and fiscal policy is constrained. The grass might indeed be greener on the other side of the fence.
Markets cannot force a country to leave the euro. But what they can do, and what the current crisis is showing is already happening, is that they can make it very uncomfortable for a country to remain in monetary union.
Is it possible to leave EMU? In a word, yes."
( http://www.lombardstreetresearch.com/ and http://synonblog.dailymail.co.uk/ )
So obviously people have got the wrong end of the stick altogether when they talk about the financial markets liking our membership of the euro, and therefore holding Irish interest rates low because of this membership. Its interesting that long term interest rates in the UK are now very low, lower than Germany's, despite the fact that sterling has fallen a lot over the last few years and seems set to fall further. You see the point is that the financial markets think ahead - they have to because they have to figure out what an economy will look like when the debt is due - and they can see that this sliding currency is good for the real economy and hence bolsters the capacity of the UK to pay its debts in the future. Meanwhile in the Irish case they can see perfectly well that Irish consumers are fleeing the eurozone and Irish businesses are consequently collapsing, and hence calling into question our capacity to pay our debts into the future. This curious point about longterm UK interest rates was highlighted by Paul Krugman, last years winner of the Nobel prize for economics:
"Below are the spreads of long-term interest rates in Britain and Spain against Germany. Britain has, despite worries about its budget, managed to cut rates significantly vis-a-vis the core eurozone countries (0.6 percent on long term rates is fairly big.) In addition, the fall in the pound has made British products a lot more competitive.
I think the Spanish comparison is instructive. Like Britain, it’s had a major housing bust. But Spain has basically had nothing happen to offset that shock.
So I’m actually fairly hopeful about Britain; right now, the fact that it’s not on the euro is serving it well."
( krugman.blogs.nytimes.com/2009/04/24/a-quick-note-on-britain/ )
Krugman is not a peripheral figure in current economic thinking, clearly this is the view thats abroad in the financial markets. And to clarify that view is: being in the euro is bad for an economy and hence we will mark down the quality of its debt accordingly. In otherwords the complete opposite to what the EU is trying to brainwash the Irish people with.
Btw people here are wondering why McWilliams didn't mention how all Irish debts willl vastly increase if we devalue etc, the reason is that that is a LIE pure and simple. Virtually all Irish debts, ie debts owed by Irish businesses to banks, debts owed by consumers (including mortgages) to Irish banks, and Irish govt bonds are denominated in Irish guaranteed and issued euros. These debts are then devalued alongwith the currency and this is NOT considered by the financial markets to be a default, although some of the financial players would lose money on it just like they did when we devalued before. The only exception to this are the rumours that the semi-nationalised Irish banks are now being used by the ECB as conduits to buy Irish government bonds with some kind of mysterious ECB money. What shady transactions are taking place here is anybody's guess (and it looks an awful lot like a deliberate attempt by the ECB to destroy us by placing us into the Argentina type vice, ie having a currency that is destroying the real economy but not being able to leave because of crippling debts in a different currency, a vice we are currently NOT in) but that could lead the Irish banks into losses in the event of a devaluation, otherwise they incur no great loss from the devaluatiuon either. McWilliams seems to be referring to this but otherwise he doesn't address this nonsense about huge Irish debt implications because it simply isn't true.
Meanwhile the euro inspired meltdown of the Irish economy gathers pace. Irish farmers thought they were immune from the housing crash, and they also sell a product that is mostly immune from a fall off in demand but now they find that the euro is crippling them. You could almost say that panic is spreading into that area, which should be the hope of the Irish economy right now. Irish dairy farmers, previously the great money spinners of Irish agriculture, are now asking for food stamps because they are being paid 1983 prices for milk, which is way below the cost of producing the milk (Irish Independent Farming Supplement 28 April 2009 p.1, 5.). Why has that price collapsed you may ask? If you think about it its hardly because of a fall off in demand, there aren't that many people who are not taking milk in their tea because of the recession! Its just not that kind of product. Glanbia et al would tell you that you simply cannot sell Irish dairy - or any other - produce in Irish or UK stores because the euro makes it all uncompetitive. We now have the spectacle of Tesco stripping about "3 or 400" Irish products off their shelves in a desperate attempt to stop the exodus over the border. (Bear in mind that Tesco is the largest retailer in the Republic of Ireland, having bought Quinnsworth some years ago, and it is now said that they will spread this policy across all their stores which should greatly increase the meltdown for Irish food producers and all Irish manufacturers.) You can be sure the Irish dairy products will be among the first to go. Tesco claim they had to do this because their research showed that as many as 40% of Irish people were doing their shopping across the border, which is a pretty incredible situation and shows how much this sterling rate is crushing the Irish economy (Sunday Times 10/5/2009 Business Section p.5). Its said now that Irish beef farmers are losing between 100 and 200 euro per head of cattle (Irish Independent Farming Supplement 28 April 2009 p.15) and the Meat processers are clear that the reason for this is the euro:
"The weakness of sterling will wipe 150m euro off the value of Irish beef sales to Britain this year., Meat Industry Ireland (MII) has predicted.
The processor representative body said the drop in sterling's value relative to the euro was costing the equivalient of 45c/kg, or 153 euro/hd, on a 340kg steer."
The situation is so bad that a Teagasc advisor speaking in Solohead a few weeks ago advised that:
"Increasing milk output will only make you go bust faster."
(Irish Independent Farming Supplement 28 April 2009 p.1, 5.)
I suppose what we need to know is to what extent the meltdown in the Irish private sector (which is now extending way past just the construction area) is caused by the normal fall off in demand caused by the recession as opposed to the flight to the sterling area? When companies see their business slump which is the main factor? Well take the printing trade which has been described here on politics.ie as another example. When it was found that the Dundalk Chamber of Commerce was doing its printing north of the border you had comments like this from sheedy's left peg:
they are not the only people doing this,, the RTE GUIDE is printed in england so is all DISCOVER IRELAND printing and all big government contracts are printed in portugal and spain
i know this because im a printer by trade and am working a 3 day week like most of the industry, people are losing their jobs in the hundreds week after week because of the amount of work going abroad
its a national disgrace ( http://www.politics.ie/economy/64878-dundalk-chamber-commerce-goes-up-north-printing.html )
and from Alliance 109:
"Companies are folding or contracting on huge levels. We lost out on the ballot papers which we printed for years to a UK company. I know others have lost out on things from political parties. It sticks in my throat to say it, but SF are the only political party I know getting their stuff printed locally. FF down this way have gone abroad. I don't know about the rest but i don't know any other printer in our area who is printing material for any political party.
I vomited when I heard Lenihan using the word "patriotic" and "unpatriotic" but then the guy has the gall to head to that very country for his printing when people down here are facing the dole queues. Lets not kid ourselves, could you imagine what would happen if it were found out that London sent any government printing to France or Germany??? Heads would be rolling. We seem to put up with stuff that other countries wouldn't. Our politicans have no feeling of responsibility to us, they don't really answer to us. They just have to worry about themselves and theirs.
Our prices are cut to bare minimium, we cover only wages and materials and are still being beaten on prices and loosing customers to companies outside the state. The government may have to tender EU wide but they can very easily create stipulations that make it impossible to do certain printing abroad. When I heard that all the Junior and Leaving Cert papers are printed abroad it made me sick." ( http://www.politics.ie/economy/64878-dundalk-chamber-commerce-goes-up-north-printing-3.html )
The point is that there is still a demand out there by Irish people for printing. We are still printing ballot papers, exam papers, election literature and tourist brochures etc but the fact is that Irish printers are not seeing any of this demand, a problem that would be cured by a devaluation which would then save those jobs and all the others!
maxthedog:"Face the facts Ireland does not have an economy. We are a clearing house. Raw material comes in, goods go out, wages and a commision is recieved by the gratefull Irish. We have nothing to offer. Name one thing that we can beat a rival on."
I think thats unfair though, we do have some industries and the euro exchange rate thing is giving them an unfair bad name that they don't deserve. Meaning I think that if we had a fair exchange rate you would see that many of those industries are quite competitive. We make most things in Ireland that an economy needs. I admit though that we have less industries than we used to have, during the Celtic Tiger the real lasting irish industries were quietly taking a hammering. Tourism is not doing well at all (caused again I think by the exchange rate, EU funded motorways destroying the scenery and immigration eroding our 'Irishness'), the EU destroyed our sugar and fishing industries and now the exchange rate has destroyed the crystal industry.
youngdan: "That is a good read scolaire. I would opine that the Irish banks had their arms twisted by secret promises of potential loses being covered and eventual ECB buying of the worthless nama bonds at face value. Otherwise the bond auction with a cover of 1.1 would not have been covered at all. The ECB can not directly buy so they have straws.
Elsewhere the quote of Aherne sums up the sitution.
"Small open economies that have suffered property crashes and associated economic and financial crises have almost always relied on devaluations of their currencies to bring about recovery.
Devaluations boost exports and reduce imports by helping to restore lost competitiveness.
As members of the European single currency area, devaluation is not an option. So our economic recovery depends on the Government's ability to engineer a devaluation of sorts by cutting wages across the economy. This is necessarily a more clumsy process than letting the currency drop."
(Sunday Independent 15 Feb 2009 Business Supplement, p.2.)
Now in the euro actual wages must be slashed and the mugs will be able to figure that out a lot easier.
As this slashing or more lightly job exporting picks up steam there will be fewer wishing to become debt slaves"
Many thanks and I agree with you that the ECB is probably behind this whole Nama thing, I imagine their plan is simply to move in and control the Irish economy via nama by offering to buy up that bank later for a firesale price. Its said now that that bank will contain a lot of 'performing' loans which may in fact prove very profitable for the ECB.
Exactly Ahearne does lay it out clearly, Irish economists are talking about massive private sector wage cuts as the solution to the problem, at least of the order of 25 to 50% (anything less would not be big enough to at least begin to tackle the competitiveness gap) and how can Irish people take those wage cuts when so many of them are drowning in debt? Thats the real point about deflation, it increases the real interest rate, and we have one of the highest levels of personal indebtedness in the world right now making deflation a very unattractive option.